Macquarie Infrastructure Holdings, LLC
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to Macquarie's Infrastructure Company First Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only-mode. We will have a question-and-answer session later on and instructions will follow at that time. [Operator Instructions] As reminder, this conference is being recorded. And now I will like to welcome our host for today's conference Mr. Jay Davis, Managing Director. Please go ahead.

[Jay Davis:]

Thank you, Carmen. Good morning and welcome once again to Macquarie Infrastructure Company's earnings conference call. This one covering the first quarter of 2015. Our call today is being webcast and is open to the media. In addition to discussing our quarterly financial performance on this call, we've published a press release summarizing the results and filed a financial report on Form 10-Q with the Securities and Exchange Commission. These materials were released last evening and may be downloaded from our website at www.Maquarie.com/mic. Before turning the proceedings over to Macquarie Infrastructure Company's Chief Executive Officer, James Hooke, let me remind you that this presentation is proprietary and all rights are reserved. Any rebroadcast or other use of this presentation in whole or in part without the prior written consent of Macquarie Infrastructure Company is prohibited. This presentation is based on information generally available to the public and does not contain any material non-public information. The presentation has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any security or instrument. This presentation contains forward-looking statements. We may in some cases use words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. A description of known risks that could cause our actual results to differ appears under the caption Risk Factors in our Form 10-K. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware could also cause our actual results to differ. The forward-looking events discussed in this presentation may not occur. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation, whether as a result of new information, future events or otherwise except as required by law. With that, it is my pleasure to introduce Macquarie Infrastructure Company's Chief Executive Officer, James Hooke.

[James Hooke:]

Thank you, Jay. And thank you to those of you participating in our earnings call this morning. We appreciate you taking the time to join us for this update on the performance and prospects of MIC. As reflected in our results press release and 10-Q published last evening, our business has performed well during the first quarter, indeed ahead of our expectations. The substantial improvement in cash flow generation this year versus last was a function of principally three matters. First, the consolidation of IMTT and importantly the improvement in the operations of that business, notably the improved cost controls and lower than anticipated maintenance capital expenditures this quarter. Second, the strong performance of Atlantic Aviation, driven by positive industry trends, improved market share and the acquisitions completed by that business over the last year. And thirdly, consistent level of performance on the part of our Hawaii Gas and contracted power and energy businesses taking into consideration the various acquisitions and divestures that have taken place in CP&E since this time last year. As a result, we reported an increase in proportionally combined free cash flow of nearly 90% in the aggregate and nearly 46% on a per share basis for the first quarter. Specifically, MIC generated $1.68 per share for the first quarter of 2015 compared with $1.15 per share for the first quarter of 2014. From I sit however, I think its better view this as an underlying growth of 32% to approximately $1.52 per share. We had approximately $0.16 per share of items that flatted our results a little. The reported increase was offset in part by a reduction in the contribution from IMTT stemming from lower heating revenue and a decrease in spill response activity this year. I'll have more on that in a moment. The other item affecting the results was of course the increase in the number of shares outstanding in the first quarter of 2015 versus 22014 related to the acquisition of IMTT, the acquisitions of IMTT and BEC and the reinvestment of fees by MICs manager. Notwithstanding these items, we appear to be solidly ahead of our forecast relative to growth in free cash flow in 2014 versus – in 2015 versus 2014. In fact, we generated 30% of our expected free cash flow in the first 25% of the year. We believe however that’s it’s a little early in the year to contemplate revising our 2015 guidance. At this point, we reiterate our guidance and expectation that MIC will generate year-on-year growth in both free cash flow and dividends of 14% in each of 2015 and 2016. But we acknowledge that we're ahead of schedule as we finish the first quarter. There are couple of very specific reasons as to why our headline free cash flow per share was better than many had anticipated. One, maintenance CapEx at IMTT was unusually low in the first quarter at $2.5 million it was less than 6% of our projected $45 million for the year or a $11.25 million per quarter. This was the result of ongoing efforts to put in place processes relating to the review and approval of maintenance CapEx request and we think those approvals and associated maintenance CapEx spending will accelerate over the remainder of the year. In addition, there is an amount of seasonality in maintenance CapEx at IMTT depending on where the project happens to be. Cold winter weather will invariably slow down maintenance work. So whilst it was considerably lower in 2014, timing issues have made it lower that even we expected to be on a full year basis. Assuming the run rate of $11.25 million per quarter had occurred in the first quarter, our free cash flow per share would have been $0.12 per share lower all levels being equal. A second factor affecting free cash flow growth for the year was lower state taxes in 2015 that are a consequence of the first quarter performance fee. While performance fees are paid in shares, they are non-cash item, expense item, but low as MIC taxable income. So while the share issuance to settle performance fees is longer term dilutive, the tax shield provide is actually short term accretive. A state tax benefit of $0.16 per share will be realized over the course of the year with a benefit in the first quarter being approximately $0.04 per share. So without these two favorable anomalies, free cash flow per share would have been $1.52 for the quarter, still up over 32% versus the first quarter in 2014. A third factor is the previously mentioned seasonality associated with Atlantics new FBOs in Florida. As we've noted in the past, those facilities generate the majority of their gross profit and free cash flow in the cooler months of the year between November and May. Consistent with general aviation traffic patterns in Florida generally. While Atlantic benefited from the both the contribution from these sites and the favorable trends in general aviation overall in the first quarter, we would expect to see a tapering of the contribution of the Florida FBOs to year-on-year growth in the second and third quarters of the year. Nevertheless, with the increase in free cash flow, the MIC Board has authorized a cash distribution of $1.07 per share for the quarter. The distribution will be made on May 19 to shareholders of record on May 14. The payment of $1.07 per share is a 4.9% increase over the $1.02 per share paid out for the fourth quarter of 2014. Our payout ratio, whether you look at it on the basis of the current dividend annualized or on a 12 month – a trailing 12 month basis is just is at or just slightly below our target of between 80% and 85%. So while we are ahead of schedule in 2015, we will wait until we are further into the year before considering revising our guidance BEC. One of the factors that will offset the expected reduction in free cash flow growth from Atlantic in the middle of the year is the addition of Bayonne energy center to our CP&E segment. The BEC acquisition closed on April the 1st, slightly earlier than we had expected. This will give us three full quarters of contribution to our results in 2015 from that business. At this point, we are expecting that BEC will perform at levels we discussed when we announced the acquisition. The contribution to our consolidated results will reflect acquisition related expenses. However, a portion of those about 700,000 were captured in the CP&E segment results for the first quarter, another roughly $9 million will flow through in the second quarter. As we've done in the past, we'll provide you with what we believe to be a clear view into the underlying performance of the business with and without the deal cost noise. Having reached financial close, we are now – we've now turned our attention to the two principal opportunities in front of us with respect to BEC. The first is refinancing the current debt facility and the second is developing additional generating capacity on the land adjacent to the existing BEC site. We are pleased to have [ph] the manager of the original BEC project Mike Gregg, as our General Manager. Mike's key focus will be on the proposed expansion of the facility. Mike will help us to begin move – to begin to move forward with the planning and permitting processes, the evaluation of equipment options and ultimately the construction of an incremental 100 megawatts of generating capacity on the site. With respect to the refinancing of BECs debt package, we are looking at a number of alternatives and expect to be in a position to make a public announcement on that matter later in the year. On the subject of capitalizing our businesses, I am pleased to report that we have three new lenders in the syndicate supporting MIC through participation in our holding company revolving credit facility, each of credit agricole, [ph] regions and American savings bank are participating the revolver in amounts that increase the overall size of that facility from $250 million to $360 million. The terms of the revolving credit facility are unchanged as a result of the increase. We thank these additional institutions for their commitment to our continued growth. We drew down $155 million on the MIC level revolver to fund a portion of the acquisition of BEC. We did this because drawing on the revolver and paying down more expensive debt at IMTT lowers our overall cost of debt. Including the increase in revolving capacity that I just mentioned, we have approximately $1.1 billion in available resources that can be deployed in the growth of our businesses. As we said during the capital raise for BEC, the reason for upsizing the MIC revolver and for maintaining so much liquidity is that we want to be well positioned to take advantage of any dislocations in the market that could occur in any of our four businesses. Taxes and the impact of performance fees. One of the matters that we keep a sharp eye on is our taxes. As mentioned previously, the acquisitions of BEC provides us with additional accelerated depreciation associated with the relative newness of the asset of that business, and potentially incremental tax shield as a result. At our last update, we though it would some time beyond the end of 2017 before MIC faced the material federal income tax liability and consolidation. Since and as a result of that continued out performance, our shares have outperformed relatively to our benchmark index and accordingly our performance fee was paid. There was a tax benefit associated with that as well, both in the current year as I described earlier and over the long-term. Together, the accelerated depreciation and the performance fee will help reduce both the federal and state income tax liabilities of MIC and its operating entities in 2015. To the extent the fee increases our consolidated net operating loss carry-forward, we extend further into the future to the point which we could have a material federal income tax liability. We now believe the date at which MIC could at least theoretically become a federal tax payer is sometime in late 2018. We have again being able to push this date out. In reaching that conclusion, we do not assume that we invest in any other businesses that provide us with additional tax shield. We do not assume that we invest in the additional growth of our existing businesses and we do not assume that we invest tax equity in any other businesses. In essence, we assume that we stop doing much of anything other than normal course CapEx. Thus we view the potential to pay federal income taxes in late 2018 as part of the conservative forecast. It’s fair to say that I'll be solely disappointed if our earnings call in early 2018 includes the words federal income tax liability this year. C-Corp conversion. As many of you will have seen we are proceeding with efforts to convert MIC from an LLC to our regular corporation and we'll conduct a special meeting of shareholders to vote on the matter on May 15. We commenced distribution of the proxy related to the meeting immediately thereafter. Holders of record on March 25 will be eligible to vote at the special meeting. As a reminder, there are two principal matters being put to vote on the 15. First, shareholders will be asked to approve the conversion of the company from a Delaware limited liability company to a Delaware Corporation. Included in the proposal, our provisions to select Delaware as the venue of choice, the adjudication of lawsuits that maybe brought against the company and the issuance of 100 shares of Class B shares to MICs manager, those shares will have the right to appoint the Chairman of Board of MIC attached to them. The same right as the manager has today under the existing LLC agreement. We believe the conversion will do two things. First, it will open the company up to potential inclusion in various main stream stock indices. As an LLC, MIC is not eligible for inclusion in for example, the Russell indices. Second, by changing from an LLC we avoid the potential confusion in the market amongst investors who may look at MIC and wrongly conclude that the company as pass through entity, even though MIC has not being treated as a pass through entity since 2016. Both of these have the potential to increase the level of interest in our shares. The Board of Directors has recommended a vote in favor of the conversion and related provisions. With the second proposal, shareholders are asked to approve an authorization for the company to issue from time to time up to 100 million shares in preferred stock. Our board has represented that it would not approve issuing or using preferred stock, a defensive or anticipate-takeover measures unless approved by shareholders in advance. Proposal number two will only become effective if proposal number one the conversion to a corporation is passed as well. Again, the Board of Directors has recommended a vote in favor of the authorization to issue preferred shares. I encourage you to make your views known by voting on these proposals at your earliest convenience. If you have questions regarding these matters, please contact Jay Davis or our proxy solicitor, Okapi Partners, here in New York. Please note that these matters are part of the special meeting that will be held on May 15. You will also have received a separate proxy related to our annual general meeting that will be held on May 20th. I would encourage you to vote on the matters put forth in that document as well. With that as an overview, I'll share a few observations on the performances of the operating businesses. IMTT. In February I characterized the impact of lower oil prices on IMTT as neutral to a mild positive. I did so, because although the contango in crude and some refine petroleum product pricing was putting some pricing power into storage, it had only a minimal impact on IMTT. The impact on IMTT was muted because one, IMTT doesn’t store a meaningful amount of crude and two, IMTT operates at what is essentially full capacity and had no material excess storage available anywhere. As a consequence, the financial performance of the business during the first quarter reflects what is basically a steady state, continued improvement from ongoing implementation of the initiatives we identify when we acquired the second half of the business, partially offset by the non-recurrence of some heating and spill clean up revenue in 2014. At its core, IMTT remains a stable generator of attractive cash flows. The decline in revenue and flat gross profit generated in the first quarter of this year, compared with 2014 reflects two things. One, the so called Polar Vortex in 2014 not only produced record cold, but also drove prices for natural gas sharply higher. IMTT normally burns natural gas to generate steam to heat tanks containing heavy products. While certainly felt cold in the northeast this winter, it wasn’t as cold in other parts of the country and as a consequence gas supplies remain plentiful and prices did not spike to the same extent as last year. The result was a reduction in revenue of $5.1 million compared with the first quarter last year and $3.9 million in gross profit. Second, OMI Environmental Services, the former Oil Mop, was involved in a couple of spill clean up effort in the early part of 2014. In particular, we noted an incident on the Houston ship channel at that time and these generated incremental revenue and gross profit to IMTT. As we have seen in the past the performance of OMI is choppy and unpredictable at best. The absence of any meaningful amounts of spill activity thus far in 2015 contributed to a further reduction in revenue of $7.5 million and gross profit of $3.3 million. P&L expenses were down for the quarter, but keep in mind the lower cost of fuel and reduced cost at OMI I just described, I can say with confidence that we are on track to realize the $10 million per year in savings that we targeted last July and that you should se that in the P&L on a run rate basis by the end of this year. These factors translated into small headline decline in EBITDA about 1.3% versus the prior comparable quarter. However, underlying EBITDA excluding these items was up by a 0.5%, a reduced level of taxes and dramatically lower maintenance CapEx however contributed to a 54.5% increase in free cash flow. Maintenance capital expenditures for the quarter totaled just $2.5 million. I can tell you that I never expected to say maintenance CapEx at IMTT was $2.5 million for the quarter. The decrease reflects the implementation of processes and procedures around the approval of CapEx projects that will make expenditures both lower and more predictable in the future. In the first quarter however the implementation of those procedures, together with the weather slowed the rate of spend abnormally. Where we expected that maintenance CapEx of IMTT would impact free cash flow per share by approximately $0.15 per share, it turned out to be only $0.03 per share. So again, we had a $0.12 per share benefit in the first quarter that we will probably give back later in the year. We continue to believe that IMTT will incur maintenance CapEx expenses of about $45 million for the full year. Trading at IMTT through the first few weeks of the second quarter remains on plan. We continue to manage expenses effectively and look for ways to create additional value with the business. Atlantic Aviation. Turning now to Atlantic Aviation. I am inclined to use the phrase from Lou Pepper the CEO of Atlantic Aviation in describing the performance of that business in the first quarter. Atlantic Aviation was blown and gone during the first three months of the year. Atlantic put together an outstanding results on the back of continued positive trends in general aviation and contributions from sites required over the past year. Atlantic generated a 24% increase in gross profit and 40.5% increase in EBITDA in the first quarters of this year versus last. Clearly, acquisitions made over the past year were effective. We added about a 11% to the total number of basis in the network, including 6 basis in the Florida market and the Florida market has been good this year. We set a top EBITDA target for our Galaxy acquisition and after one year of ownership I am glad to say we are on track. We've always said that the FAA reported data on flight movements was an indicator of the health of the industry, but no means a perfect correlation with the performance of Atlantic Aviation. Never has that been clearer than in the first quarter of this year. When the FAA finally published March numbers in the middle of last week, total flight movements for the quarter were up approximately 1.8% compared with the first quarter of 2014. Notable, in the data was the fact that international traffic was down substantially about 1.6% for the quarter. We assumed this is reflective of the economic challenges in many parts of Europe. This data has to be a disappointment for those networks with material non-US component. But the real story is in how a 1.8% improvement in total general aviation flight movements turned into a 9.4% increase in the same store gross profit and a 17% increase in same store EBITDA at Atlantic. Same store EBITDA growth benefited from strong volume growth, on average larger aircraft filling more of their larger fuel tanks with Atlantic fuel. Second, market share gains, especially from sites where we compete head to head with Signature, other than Teterboro [ph] and Houston-Hobby where we are doing major innovation last year. And third, good margin management. When we bought Galaxy, we said we would realize benefits across our existing portfolio and not just at the Galaxy locations. Part of the 9.4% same store gross profit growth is the result of the acquisition of the Galaxy locations. With industry wide flight activity up 1.8%, the 9.4% gross profit gain was aided by customers shifting their business to Atlantic, customers now have more choice and are voting with their feet. This was particularly evident at Las Vegas over the past weekend, many of you will know that Mayweather beat Pacquiao 116 to 112 in Saturdays nights fight. However as reported in aviation industry news yesterday, there were 257 private jet on the ramp of Atlantic Aviations Las Vegas FBO compared to 150 on the Signature flight services ramp. I am actually a touch disappointed by our 257 to 150 win. Given that I've always thought Atlantic was at least twice as good business at Signature, I would have thought our Las Vegas facility could outperform the competitor by more than 1.71 times. In spite of an increase in interest expense related to the incremental debt associated with acquired sites and an increase in maintenance CapEx compared with the first quarter of 2014, Atlantic delivered a very attractive increase in free cash flow for the period of 45%. Atlantic Aviation has continued to perform well through the first weeks of the second quarter. As is customary at this time of the year, we are basking in the smell of roses, the taste of mint juleps and the sound of hundreds of private jets on the ramp of Louisville for the Kentucky Derby, as well those in Las Vegas for the latest Fight of the Century this past weekend. Of course the aroma was slightly different in Las Vegas. Contracted power and energy. The contribution from our portfolio of contracted power and energy businesses was mostly noise free in the first quarter. The results reflected the contribution from our solar and wind businesses without the complication of additional acquisitions of divestures as had been the case in the third and fourth quarters of 2014. The segment absorbed about $700,000 of expenses associated with the acquisition of BEC as I mentioned earlier. But that’s pretty clean and shows that the existing portfolio of renewable energy assets is capable of generating just under $30 million per year in EBITDA, combined that with the expected contribution from BEC for three quarters of the year that we will own that business and the segment EBITDA should be generating right about $75 million of EBITDA for 2015. As I mentioned last quarter, CP&E is now our third largest segment on a EBITDA basis. The modest decrease in cash interest expense in the quarter reflects the absence of the debt associated with the district energy business that was sold in the third quarter of 2014 and as noted in prior period, maintenance on the solar and wind projects is covered by respective O&M contracts. We continue to look for opportunities to deploy capital in CP&E and the expansion of our BEC facility. Other generating assets and beyond – by own is one way. As I said on our earnings call a few weeks ago however, we will be disciplined with respect to this sector. In short, it was a clean quarter for our clean energy wind and solar portfolio and we're anxious to see the contribution from BEC come on line in the second quarter. Hawaii Gas. Hawaii Gas put together a good first quarter in 2015. The volume gas sold increased, margin on sales in the unregulated side of the business improved and cost and taxes were lower. That translated into EBITDA growth of better than 12% compared with the first quarter of 2014. The volume of gas sold increased as customers continue to switch from electricity and diesel to gas. Non-utility margins improved as we continued to shift supply mix to more important supply away from the less stable and less competitive local refineries. I mentioned four areas of focus of Hawaii Gas during our February call and I am pleased to say that the team at Hawaii Gas made progress with respect to each of those during the quarter. The first area was cost control and clearly there was some improvement in this area during the quarter. SG&A decreased versus the fourth quarter – the first quarter in 2014, primarily as a result of lower sales and promotional costs. But one quarter does not a trend make, expenses are something we will continue to have on our radar. The second area had to with the pursuit of a rate case, and in particular, making a decision as to whether or not we would file a general rate case in 2015. Ultimately we came down on the side of deferring the filing of a general rate case to 2016. The Hawaii Public Utilities Commission will be focused rightly on the conditions it may seek to impose on the proposed acquisition of Hawaiian Electric by NextEra. With close to 30 interveners and thousands or so pages of discovery expected, the HPUC itself has said that this is a process that could 18 months. Once they've cleared the decks on that matter, Hawaii Gas will be ready to proceed with a rate case filing. Our third focus area was the prosecution of docket currently in front of the HPUC regarding increasing the volume and frequency of LNG shipments into Hawaii in support of Hawaii Gases regulated business. In particular, Hawaii Gas is seeking authorization to proceed with bringing containerized LNG into the market in volume sufficient to offset up to 30% of its needs to the Napco [ph] I am pleased to report that the consumer advocate recently completed its review of the proposal, recommended that the HPUC approved this project. We expect that the commission will have all required filings to hand by the 11 of May and we'll be in a position to issue a final ruling thereafter. As a reminder, that program will result in Hawaii Gas investing approximately $13 million in growth capital over the next year. The fourth area of focus was of course our ongoing efforts to advance the dialog on the subject of largest scale bulk LNG. As a reminder, in November last year Hawaii Gas issued a request for proposals related to bringing bulk LNG into Hawaii. Over 20 proposals were received and we expect final proposals later this summer. I think it’s fair to say that we and the management team at Hawaii Gas remain engage in productive dialog with Hawaii's politicians, regulators and other stakeholders. But a final decision on the path forward with respect to LNG and Hawaii will depend on the timing and outcome of NextEra's proposed acquisition of HECO. A stable capital structure, cash interest expense flat, taxes were lower this year versus last and maintenance CapEx declined modestly at Hawaii Gas. Including the improved top line performance the business generated an attractive increase of free cash flow of nearly 64% or $5.5 million more this year. In summary, growth in sales and improved margins together with lower cash taxes and slightly lower maintenance CapEx combined to generate meaningful growth in cash generation by Hawaii Gas in the first quarter versus the last – first quarter of last year. Summary, before we open the call to your questions, I'll summarize by saying we heard you and yes this is a shorter call than we've been hosting. The first quarter of 2015 was a good one for MIC from a cash generation point of view. Our results reflected the benefits of acquiring the second half of IMTT and our businesses, particularly Atlantic Aviation performed better than expected. Trading through the first weeks of the second quarter has reflected a continuation of the positive trends we saw through the first three months of the year. MIC remains in a strong position financially, including increased revolver capacity MIC has approximately $1.1 billion of available resources with which to fund the growth opportunities. As at the end of the first quarter, MICs proportionately combined leverage ratio stood at 3.76 times EBITDA, including solar, wind and the corporate segment and performance of the acquisition of BEC prior to any refinancing. Third, in spite of nearly 5% increase in MICs quarterly cash dividend, our payout ratio depending on whether you look at it on a current dividend annualized or actual on a trailing 12 months basis is at or just slightly below our target of 80% to 85%. We reiterate our expectation that we can grow free cash flow and MIC dividend by 14% per year in each of 2015 and 2016 and our position relative to having federal income tax liability and consolidation has improved as we now don’t foresee anything and having any material liability until late 2018. And we are pleased to have started 2015 better than expected. With that, I'll thank you once again for your participation in our call and ask that our operator open the phone lines for your questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Ian Zaffino from Oppenheimer.

[Ian Zaffino:]

Hi, operator. Thank you very much and very good quarter.

[James Hooke:]

Thanks, Ian.

[Ian Zaffino:]

The question would be on, you talked about the $250 million of spend that you're going to do. Can you maybe walk us through the returns that you might see on that, where exactly you might deploy that capital and how we should think about that in terms of free cash flow going forward or dividend growth going forward?

[James Hooke:]

Sure. I think the – at different projects and different businesses had a different return profile. So if I look across the spectrum of projects in the contracted, power and energy space, a contracted – a project with a 25 year or 20 year contracted power purchase agreement you will bid on a very low double-digit IRR. Conversely in the Atlantic Aviation space, a bolt-on transaction generates a sort of mid teens IRR and organic growth CapEx project that IMTT if its revenue generating can generate a slight higher IRR and if it’s a growth CapEx project that takes cost out of the business it’s a slightly lower IRR. So if you sort of blend that in with how we expect that $250 million to be spent overall on both organic projects and bolt-on acquisitions, depending on the mix I think you should look at a low sort of low teen, low double-digit to mid double-digit or mid teen IRR depending on the mix of projects. This is sort of question – the second question that people than have to think through is what's the delight before that comes online, if it’s a bolt-on acquisition, its immediately for one of the better sense, free cash flow accretive, if its an organic growth project that most of the organic growth projects at IMTT we've said you should allow a 12 month delay from when the capital initially start to be spent before it becomes cash flowing. And that’s because while some projects in IMTT take only six months to complete the construction of, others take 18 months and I think on an average basis we said to people its just under 12 months. So in terms of the growth that we deliver, we sort of factored that pipeline, the existing pipeline factors into our guidance for 2015 and 2016. I think the real question people then it comes too, okay, well what's the right of growth of 2017 and beyond 2016 and – 2015 and I think in that our answer is it depends on how prudently and how much and how fast we can deploy growth CapEx going forward. But there the sorts of return profile that we generate, I think the advantage we have in being present in four business verticals is, if at any point in time process get to heavy or returns get to low in any of those verticals we'll pull up of investing in that vertical for a period. I think someone said that, I think it was Chuck Prince that once said, when the music is playing you've got to dance, I don’t think we have to dance, if the music is playing for instance the music is a little loud in the contracted, solar and wind space at the moment and so it doesn’t make sense to dance there, other than on unique projects. In the mid stream energy space in the second half of the year we think that there will be further opportunities or there maybe further opportunities to invest. So the mix will influent it slightly, but in terms of the return profile I think the sort of blended return will be sort of low double-digit to mid teen returns.

[Ian Zaffino:]

Okay. Great. And then, just a follow-up on the comment you made about not paying taxes till 2018. In that calculation, is there any consideration of a potential Opco, Propco on any of the businesses? Would that extend that more or is that sort of factored into that 2018 number?

[James Hooke:]

There is no structural change factored into any of that. So there is a number of initiatives we could pursue that would potentially push it out further than 2018. I think what we've tried to say is the like 2018 basically assumes we spend no more capital than is in that $177 million pipeline that we've identified to people and that we do the normal maintenance CapEx required. It doesn’t improve and assume any other sort of structural change is going forward. It doesn’t assume a step up in basis by any acquisitions and it doesn’t assume any large scale growth CapEx projects that we bring on that would have accelerated depreciation on.

[Ian Zaffino:]

Okay. Great. Thanks and hopefully, you got that Tom Brady's Louisville to Vegas right?

[James Hooke:]

Yes, we very busy. We do with both minor and major celebrities.

[Ian Zaffino:]

Perfect. You're taking on that.

[Operator:]

The next question comes from the line of Jeremy Tonet [JPMorgan] Your line is open.

[Jeremy Tonet:]

Hi, good morning.

[James Hooke:]

Good morning, Jeremy.

[Jeremy Tonet:]

Congratulations on the very strong quarter there.

[James Hooke:]

Thank you, Jeremy.

[Jeremy Tonet:]

Just a couple of questions and apologies if I missed it. But as far as BEC is concerned, I believe there was kind of a captive facility on the land for IMTT power facility there. And just any updated thoughts there as far as potential to purchase that facility or any updated thoughts there?

[James Hooke:]

Yes. Thanks for the question, Jeremy. So there is a power facility that’s owned by – used to be owned by Riverstone, is now owned by Talen Energy, which is IPOing later this year, subject to the forced divesture agreement with the FERC and PJM, there is a portfolio of sites. The one site that exists with the IMTT's footprint is about a 178 megawatt co-gen facility. Its ground lease expires in 2018 and we've given notices that we will not extending the ground lease. We've indicated to the Talen that we are happy to buy at a reasonable price based on what the last three years of life for that plant reflects. To this date, we remain interested in pursuing it. It would seem to me that obviously the Talen folks are a little disappointed. We won't be renewing the ground lease. And so haven’t made any progress on that yet. We remain an interested buyer, but we are happy also to develop power facilities immediately adjacent to that. So really to get that land back in 2019 late 2018, 2019 and build new tanks on it and build a new power plant or we'll buy that plant for them for a reasonable price and upgrade it, happy to purse either of those. I think as we get closer to Talen's IPO we'll have a better sense as to what they intend to do that but no progress today.

[Jeremy Tonet:]

Got you. Thanks for that. And as far as M&A is concerned, I know it's very difficult to foretell what the future might hold, but it seems like you guys enjoy quite strong balance sheet leverage and liquidity. Just wondering from what you see out there, if you have a preference for a larger deal or a smaller deal or any particular parts of businesses, such as within midstream that you might be more interested in or any thoughts there would be helpful?

[James Hooke:]

Sure. I would say the sort of guideline we have for any deployment of capital is what's the IRR we can get on it and to that extent. As a rule of thumb the IRR with smaller deals tends to better than the – IRR big deals. And so naturally pre disposed to do better generating deals. In the mid stream space specifically we are looking for people who are over levered, I think at the moment if you sort of levered at five time as a mid stream asset or even 4.5 times you're probably over levered. And I think five became the new four and it may be will be the 3.5 becomes the new five from a leverage perspective. We are not looking for people who had sort of commodity exposure, but direct or indirect commodity exposure. So we are looking for sort of either businesses or just assets from businesses that need to repay debt. So I'd say that’s where we're at. I think we have the balance sheet capacity and the management bandwidth and capability to do deals of varying sizes. But I think history suggest that smaller deals generate better returns. So that’s sort of where we're focused. But one of the reasons we raise the capital we did with BECAUSE, one of the reasons we are consistently de-levered Atlantic is, we spent the last downturn without the balance sheet to take advantage of opportunities and we really are very focused on making sure we got the balance sheet now to take advantage of opportunities if there is any dislocations. And those dislocations could be any of the four sectors that we look at. At the moment you would say mid-stream is where the most likely dislocation will come from, but we are not restricted just for looking at mid stream but as for with – the ones that one the people, most peoples radar screen at the moment.

[Jeremy Tonet:]

That makes sense. That’s it from me. Happy [indiscernible]

[James Hooke:]

Thanks.

[Jay Davis:]

Thanks Jeremy.

[Operator:]

Thank you. And our next question comes from the line of T.J. Shultz from RBC Capital Markets.

[James Hooke:]

Hi, T.J.

[T.J. Shultz:]

Hey, good morning. Just to follow up on the $150 million to be spent this year for organic kind of growth CapEx. I guess you're not quite there on a quarterly run rate to the first quarter. So maybe you could just highlight if there are any major projects. You can highlight progress on if this is still a large number of smaller projects kind of working through the business. Just looking for some more clarity or line of sight on your ability to kind of deploy that $150 million this year and where you're spending that?

[James Hooke:]

Yes. I'd say on a run rate basis for a variety of reasons we just sort of always dog ate my homework excuses from the different businesses. We always come out of the gates a little slow on growth CapEx deployment and we always have a usually we typically have a big fourth quarter finish on that. So notwithstanding that the run rate out of the gate is it looks slow, it feels to us like we're on track to get the $150 done, probably the largest project I think if you singled anyone out is there is a large project on the Lower Mississippi that we're doing in the Geismar corridor for a petrochemical customer. So that’s probably the largest single project within that. But it feels like we're on – it stills feels like we're on track to do the $150 notwithstanding that the first quarter if you look at the first quarter run rate it looks like we came out of the block slowly, the answer is yes we did.

[T.J. Shultz:]

Okay. And then, I guess moving on, I guess on the structuring options, if we think about some of the MLP-eligible assets you have in IMTT, one scenario would be to find a GP to acquire and then drop some assets in over time, just looking for your kind of latest thoughts on that scenario playing out versus some of the other alternatives.

[James Hooke:]

Yes, look, I mean, I think there is a couple of options, one is the option of a REIT conversion. The second would be some kind of MLP structure. I think a number of folks have pitched to us the idea of buying a busted GP and then re-powering that GP by dropping IMTT assets into it. I think the challenge in these scenarios is always that many busted GPs or busted through a very good reason. So what, you then need is a busted GP that’s busted because it can be fixed and it is relatively small, does any number of folk at the moment who have busted GPs who share prices down who say the conversation is the usual sort of well, we're down 60% if you paid us a 30% premium you'd still be getting a 30% discount on where it was this time last year to which the answer is where it was this time last year is no where reflected of what true value is. So I think we remain open mined, flexible and opportunistic I don’t think there is any – we're not a religious mission to pursue one path or the other. That’s certainly one option that’s open to us, but again you have to look at what the underlying assets are and there are some GPs that aren’t busted yet and then there are some that are busted but are busted for a good reason. So it’s a definite option for us but I think the other is there is no time imperative of this point we don’t feel one because we had like 2018 before we pay federal taxes even if we sort of go to sleep at the wheel for a period and we don’t intend to do that. So we kind of look through this prudently. I think the options of those – those various options give you different options as to how you can extract value over the next couple of years of the cycle is various things unfold.

[T.J. Shultz:]

Okay, good. Makes sense. And then, you mentioned not likely looking at bolt-ons, I think in wind and solar, just given some of the strength there. So if we think about it another way, do you expect you would hold on to your wind and solar assets long term or do you think you can take advantage of selling those assets into a pretty good market and then what would trigger a decision point there on that..

[James Hooke:]

That’s a great question. I think the first thing I would say is, there are still solar and wind projects that we are looking at at the moment. They tend to be projects that for whatever nuance of the project it doesn’t fit into one of the yield cost [ph] either because of the sort of make sure of the asset and make sure of the power purchase agreement or the tax structure around it so there are still areas where we haven’t looked. But the obvious question then is, when an asset bubble forms if you are not buyer or you a seller, I think at the moment there is a lot more operating improvement or lower improvement to bring out of the existing assets, but if we get to the end of the year and we cant see a path forward to deploying more capital we certainly look at divesting. I think if you look at our history we love the district energy business, but we just ended up getting a price for that was more than it was worth for us, so we divested, by the time we divested around 8 FBO, sorry run 14 FBOs since 2009. So we are always prepared to be opportunistic with any of our assets as to if they were more to someone else than they were to us. I think the alternate path in the – in the spice and wind and solar is to wait and see if things blow up in that space to sort of hang around the hoop strategy. But we sort of – we're not inflexible and we're open to anything so we sort of see how the year unfolds and if I said, if process – there are people still smoking substances they shouldn’t and pay in prices they shouldn’t, then we love to meet them and see if they want to buy some stuff, so we're open to any of those.

[T.J. Shultz:]

Fantastic. Lastly, I guess do you expect to be included in the Russell indices that re-balance at the end of May?

[James Hooke:]

My general council has just kicked me under the table and Jay has looked at me with the stern look that I am sure you've seen before which is we can't comment on the proxy issues related to the sequel conversion and you'll need to pick that up with him offline. I won't just get myself into trouble.

[T.J. Shultz:]

Okay. Fair enough. Thanks guys.

[James Hooke:]

Thanks.

[Operator:]

And our next question comes from the line of Brendan Maiorana from Wells Fargo.

[Brendan Maiorana:]

Thanks, good morning.

[James Hooke:]

Hey, Brendan.

[Brendan Maiorana:]

Hey, James. So just on the growth capital projects, are any of these projects -- there are offensive projects in the sense that you get a return on the capital that you're deploying. Are any of them something where if you didn't do the projects, you didn't spend the capital, your EBITDA run rate of the existing asset base would be down or are lower than it otherwise would be? So even though they're offensive, maybe there is a defensive portion of them.

[James Hooke:]

Not that, it’s a good question, If I play back to – I think what you ask me, if I don’t spend some of that growth CapEx is there a chance that my EBITDA would go backwards?

[Brendan Maiorana:]

Yes.

[James Hooke:]

For the absence of spending that growth CapEx, not that I can think of off the top of my head, there is number of – I don’t want to give you an absolute, there is not one in there, partly because I am intrigue by the question I am just trying think through where we'd follow, certainly the vast, vast majority don’t fit that description. But if there is one project in there that’s triggered as I am sort of trying to work out how it could, but I don’t want to give you a definitive [ph] there is none, but its it would be de minimis or immaterial if it where.

[Brendan Maiorana:]

Okay. I mean another way to ask it or a better way to ask it is, if I just look at the maintenance CapEx spend that you guys did, let's say you only did maintenance CapEx spend, no growth projects, your EBITDA growth profile of the existing asset base would be, call it inflation, is that fair?

[James Hooke:]

I would say above inflation, the way I think it through is we are guiding people to sort of 14% free cash flow growth, on a per share basis on a constant share basis so some of that is from the returns of that growth CapEx, but some of it is also from organic, for want of a better term pricing and volume growth in excess of cost growth at the operating businesses. And so I think that is going to be ahead of inflation if it just look at it. If history is a guide and what we're seeing at moment is a guide, its well more than inflation.

[Brendan Maiorana:]

Okay, great. Last question. So last week, Tesla announced a battery for which partial residential use, I think partial is the commercial or utility use that can effectively store power from non-fuel sources. When you think long-term about merchant power, and I think BEC has the potential to be a merchant power producer for a portion of its generating capacity. With the ability to store power and deliver it at an optimal time from renewable or non-fuel based sources have a long-term impact on the merchant power market?

[James Hooke:]

It’s a great question, I think we intrigue by batteries from both the offensive and the defensive perspective, I think the area where this is the biggest issue and sort of get an education on this and look at it most is actually in Hawaii rather than in relation to BEC through the renewable penetration there. We also look at it in relation to our existing renewable assets and look at whether it would make sense to put batter back up on them a lot of folks are looking at that. There is also an interesting question for us in relation down the track if the technology improves as to whether something like BEC we would actually look at that ourselves in terms of producing power at off peak time, so that we could then sell into it. I think from BEC not to worried about it for the time being, in about I mean, sort of for the foreseeable future because BEC is cost of production available of electricity in New York harbor, in the New York market is martially advantage and that’s materially advantage because we have achieved a supply of gas, we draw off the Transco pipeline, we don’t plan LDC charge, whilst this low – while it sells into New York its actually located in New Jersey which gives it some other tax advantages. So in terms of where it fits in the dispatch curve and its relative cost position it’s highly advantage. But I do think broader sort of – it could be either be a sword or shield for BEC. I think you broader question no its good one, which is what does that sort of batter technology mean generally for power generation going forward and I think one of the things that we look at as we look at that spaces gets enormously – its potentially enormously disruptive technology for some businesses, its unique to make sure that you are not a point of marginal production or marginal producer in that space when looking at investments. I think the other that it actually causes us to wonder is, actually with the existing solar and wind facilities did that really have any terminal value at all, and that’s a interesting question for us given that battery life could will change the construction of the grid [ph] So I know certainly in the renewable sector there is people getting very excited and there is lot of trousers getting wet as to the prospects of battery. Sort of I think it could unfold in unintended consequences that’s why it enhance price as well. But it is something we're very cognizant of because it’s potentially to transform Hawaii is something that intrigues this as well.

[Brendan Maiorana:]

Okay. Well, sounds like something that pay attention to in the next few years.

[James Hooke:]

Thanks.

[Operator:]

And I am not showing any further questions. I would like to turn the call back to Mr. James Hooke for final remarks.

[James Hooke:]

Thank you very much. We'll be taking our show on the road participating in conferences on road shows over the next couple of months and we look forward to seeing a number of you at those events. If we don’t happen to see you its likely Jay will be touch with you anyway, so please make sure to save at least one really difficult question for him. I'd like to thank our great team of external advisors who put in a tremendous effort in getting us ready for the special meeting next week. It was a very big job in a very short time period and we appreciate all the help. We look forward to discussing our second quarter 2015 results with you in late July. Thank you.

[Operator:]

Ladies and gentlemen, thanks for your participation in today’s conference. This concludes the program. And you may all disconnect. Have a wonderful day everyone.